An Open Letter to Robert Reich

Robert Reich was Secretary of Labor under Bill Clinton and is currently a professor at the University of California, Berkeley’s Goldman School of Public Policy

Professor Reich:

I have some questions about some of the points that you brought up when you appeared on CNN's The State of the Union show Superbowl Sunday. Although all my own training in economics is purely autodidactic, it seems to me that your arguments rest on faulty premises.

When asked what is the fastest way for the government to create jobs (a question which itself relies on the erroneous presumption that the government has the ability to "create" jobs), you replied with a three-part answer, and first stated that "almost all economists agree" with you.

Whether almost all economists agree or not of no importance, but gives your answer an air of authority. Unfortunately, it is the policies of these same economists which have caused the mess in which America currently finds itself. While "almost all economists" may still possess authority in academia, their credibility on Main Street is sorely lacking. In addition, many economists do not agree with you. In fact, Austrian economists vehemently disagree with you.

In any case, you said that the government's first priority should be to expand the social safety net, which will cause money to go directly into circulation.

Historically, government welfare programs have been wasteful, inefficient, and corrupt. Private charities do a much better job of administering aid to those in need with the final goal of helping the unemployed get back to work. Government programs, on the other hand, lead to longer periods of unemployment by encouraging welfare recipients to remain on the dole as long as possible.

I am also curious as to how you propose to fund these programs. There are only three ways that the government can raise revenue: taxation, borrowing, and printing (both the latter are actually forms of deferred taxation). All of these methods have dire implications for the economy. Direct taxation retards economic growth by punishing producers. Borrowing crowds out investment in the private sector. Printing money causes distortions in the market, misallocation of resources, and eventually destroys the purchasing power of the monetary unit.

In addition, of what importance is "money in circulation"? You contend that passing money around will create jobs, but the fact is that passing money around is simply passing money around. What you seem to be proposing is that the government take money from some people, and then give it to people on welfare so that they can buy stuff from the same people that the government originally took the money from in the first place. How is that going to create jobs? Why not allow the people with money to invest it and build their businesses so that they can hire the people to whom the government is planning on giving their money?

Professor Reich, it seems that you have confused money with wealth. The government can create all the money it wants simply by printing it. Wealth, on the other hand, can only be created through saving and investment.

The government's second priority, you said, should be to build infrastructure — putting people to work building roads, bridges, a new electrical grid, and a broadband internet system.

While we certainly need those things, how is this going to create jobs and why is it the government's business to build them anyway?

Labor is not homogeneous. Yes, people can do many different jobs, but many jobs require specialized training and skills. While building a road may be a boon to the road construction industry, how does it benefit an investment banker who just lost his job? How does building a bridge in California benefit an aerospace engineer who was just laid off in St. Louis? Or running fiber optic cable in North Dakota benefit a real estate agent out of work in Florida?

While the government can create jobs in one sector of the economy, it can only do so by destroying jobs in another sector of the economy. Perhaps you are familiar with Frdric Bastiat's famous essay What Is Seen and What Is Not Seen. In it, Bastiat explains that when the government undertakes a project such as building a bridge we see the benefits it brings — the jobs that it creates. What we do not see are the things that are destroyed because of the project — the jobs that are not created because the government confiscates the resources needed to create them.

You may also be familiar with the Nobel Prize winning economist F.A. Hayek. One of the major themes of Hayek's work is that the free market is a discovery process. Since none of us are omniscient, none of us has perfect knowledge of market conditions. Hence, no central planner can effectively allocate resources.

In contrast, the free market's pricing mechanism provides us with the information needed to efficiently allocate resources, and rewards those who do so correctly and punishes those who do not.

Instead of relying on market signals to determine where to allocate resources, the government relies on political pressures. Most likely, roads and bridges will not be built where they are needed, but where the politicians think it will best serve them. The beneficiaries of these programs will not be the American people in general, but political patrons and special interests.

The government's third priority, according to you, should be tax cuts. I wholeheartedly agree. Let's eliminate personal income tax, property taxes, sales taxes, and corporate taxes, as well as the onerous regulations that have driven so many companies out of the country. Unfortunately, that's probably not what you meant by tax cuts, is it?

All in all, Professor Reich, it seems to me that your arguments defy logic and common sense. However, as a prominent economist, public policy expert, and opinion molder, I'm sure that you can explain what I am missing. I anxiously await your reply.

February 3, 2009